[Federal Register Volume 60, Number 206 (Wednesday, October 25, 1995)]
[Notices]
[Pages 54740-54743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26429]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36377; File No. SR-PTC-95-06]
Self-Regulatory Organizations; Participants Trust Company; Notice
of Filing of Proposed Rule Change Modifying Processing System
October 16, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on September 15, 1995, the
Participants Trust Company (``PTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-PTC-95-06) as described in Items I, II, and III below, which Items
have been prepared primarily by PTC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
\1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change will amend PTC's rules to reflect changes
to its processing system that will cause both the deliver and receive
sides in a securities transaction to simultaneously receive debits and
credits to their respective securities and cash positions.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, PTC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. PTC has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.\2\
\2\The Commission has modified the text of the summaries
prepared by PTC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to amend PTC's rules to
reflect changes to its processing system which are intended to satisfy
a commitment (``Commitment No. 3'') made by PTC to the Commission and
to the Board of Governors of the Federal Reserve System (``Board of
Governors'') when PTC was established. Commitment No. 3 stated that PTC
would ``make the necessary technical changes (including Rules changes)
for Delivering Participants to: (i) Be immediately notified, or able to
ascertain, that securities debited from a Delivering Participant's
Account or associated Transfer Account have not been credited to the
Receiving Participant's Account or associated Transfer Account; and
(ii) be able to retrieve such undelivered securities and to redeliver,
pledge or hold such securities.''\3\ The proposed rule change
eliminates the optional matching process currently available under
PTC's rules between delivery and receipt of securities transfers which
creates an intermediate status characterized as the ``abeyance
account.'' The proposed rule change deletes the abeyance account,
amends the receipt mode provisions, and provides for simultaneous
credits and debits of an account transfer to both the receiving and
delivering participants or limited purpose participants.\4\ PTC
believes that Commitment No. 3 is satisfied through the elimination of
the situation where a delivering participant's securities account has
been debited and cash account credited when the receiving participant's
securities account has not been credited and cash account debited.
\3\Securities Exchange Act Release No. 26671 (March 28, 1989),
54 FR 13266 (approving PTC's application for registration as a
clearing agency under Section 17A of the Act) and letter from the
Board of Governors approving PTC's application for stock in the
Federal Reserve Bank of New York (March 27, 1989).
\4\The abeyance account and the receipt mode provisions are
discussed in detail later in this notice.
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These amendments are proposed to take effect on or about November
6, 1995, concurrent with the implementation of a new software release,
SPEED Release 5.6, which will make the corresponding changes to PTC's
SPEED transaction processing system.
1. Delivery of Securities Subject to an Account Transfer Under Current
Processing System
A delivering participant or limited purpose participant initiates a
transfer of securities to another participant or limited purpose
participant by instructing an account transfer of securities from its
account or associated transfer account. If the account from which the
transfer is requested satisfies the conditions set forth in PTC's
rules,\5\ then PTC debits the securities from the account or associated
transfer account of the delivering participant or limited purpose
participant and, if the transfer is versus payment, credits the related
cash balance.
\5\PTC Rules, Article II, Rule 13, Section 1(b) generally
requires sufficient securities and Net Free Equity (``NFE'') with
respect to the account of the delivering participant or limited
purpose participant. NFE measures the value of the collateral which
is available to secure liquidity for payment of the account debit
balance associated with the transaction. PTC Rules, Article II, Rule
9. PTC will not process an account transfer if, as a result of such
transfer, the required NFE is not available in the account at the
time delivery is attempted.
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2. Receipt of Securities Subject of an Account Transfer Under Current
Processing System
Under PTC's rules,\6\ prior to crediting securities to the account
of the receiving participant or limited purpose participant or in an
account transfer versus payment its associated transfer account, the
receipt of the securities must comply with the receipt mode selected by
the receiving participant or limited purpose participant. Furthermore,
if the transfer is versus payment, the receiving participant must have
sufficient NFE, and the resulting debit to the account cash balance
must not cause the receiving participant's net debit balance to exceed
its Net Debit Monitoring Level (``NDML'').\7\
\6\PTC Rules, Article II, Rule 13, Section 1(c).
\7\PTC will not process transactions that increase a
participant's net debit balance to a level greater than its NDML.
When the NDML is reached or exceeded, PTC is entitled to require
either confirmation of the participant's ability to pay its debit
balance or prefunding of such debit balance. PTC Rules, Article II,
Rule 2, Section 4.
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3. Receipt Modes
Generally, a participant or limited purpose participant currently
may choose one of the following receipt modes for receiving securities
to its account or its associated transfer account in an account
transfer versus payment: Auto Buy-In Mode, authorizing the receipt of
all transactions; Auto-Match Mode, authorizing the receipt of all
previously designated transactions either listed with specificity or by
designating specified dollar tolerances; or Manual Match Mode, in which
no transactions are preauthorized.\8\
\8\PTC Rules, Article II, Rule 11. These provisions are
eliminated by the present rule change.
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Securities deliveries for which the receipt is not preauthorized
are posted to the await match list associated with the receiving
account and recorded in an abeyance account and are credited to the
receiving account or associated transfer account only after the
receiving participant or limited purpose participant approves the
transfer. Any securities remaining on the await match list that are not
approved or rejected prior to the close of daily processing are deemed
approved by the receiving
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participant or limited purpose participant.\9\
\9\PTC Rules, Article II, Rule 11.
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4. Abeyance Account
Securities that are debited from the delivering participant's or
limited purpose participant's account but not simultaneously credited
to the account of the receiving participant or limited purpose
participant because the receipt is not authorized by the receipt mode
utilized by the receiving participant or limited purpose participant
are recorded in the abeyance account until the transfer can be
completed. In the current processing system, the delivering participant
or limited purpose participant has no means of ascertaining whether the
transfer has been completed to the account or associated transfer
account of the receiving participant or limited purpose participant or
whether the securities remain recorded in the abeyance account and
placed on the await match list associated with the account of the
receiving participant or limited purpose participant. Recording the
securities delivery in the abeyance account is not deemed to effect any
transfer of the securities or create or extinguish any interest in the
securities held by PTC prior to such recording.\10\
\10\PTC Rules, Article II, Rule 3, Section 1 and Rule 13,
Sections 1(c)(i)(B) and 1(c)(ii)(B).
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5. Policy Considerations Behind Commitment No. 3
A main policy consideration leading to Commitment No. 3 was the
concern that in the case of an uncompleted account transfer versus
payment the unexpected return to the delivering participant of the
unmatched securities in the abeyance account and the corresponding
elimination of the credit to the account cash balance of the delivering
participant could place liquidity pressures on the delivering
participant. Such liquidity pressure could occur at the end of the
processing day just prior to settlement when there is little time for a
participant to fund an unanticipated debit.
6. Summary of Proposed Systems and Rules Modifications
Since 1989, PTC has considered various proposals to address the
concerns behind Commitment No. 3 including an inquiry facility for
delivering participants or limited purpose participants to ascertain if
their deliveries had been received into the receiving participant's or
limited purpose participant's account or associated transfer account in
the case of an account transfer versus payment to the account of a
receiving participant. The present rule change proposes to satisfy
Commitment No. 3 by modifying the processing system to debit and credit
simultaneously the accounts of delivering and receiving participants
with securities and cash irrespective of the receipt mode chosen by the
receiver. PTC believes this modification resolves Commitment No. 3
because there will no longer be a situation where the delivering
participant has received a cash balance credit before the receiving
participant has received a cash balance debit.
The functionality of the PTC match receipt modes will be maintained
only as a transaction monitoring tool to designate the status of
securities in the account or associated transfer account of the
receiving participant or limited purpose participant after the transfer
has been credited to the account. because debits to the cash balance of
the account of the receiving participant will be immediate, it is
anticipated that receiving participants will monitor their account son
a timely basis.
7. Proposed Securities Transfer Processing Sequence
Processing changes also will be made in SPEED Release 5.6,\11\
altering the sequence of transaction processing. The credit of
securities will be posted to the account or associated transfer account
of the receiving participant or limited purpose participant regardless
of the receipt mode applied to the account. Similarly, in the case of
an account transfer versus payment, the associated debit of cash will
be posted to the account of the receiving participant or limited
purpose participant regardless of the receipt mode applied to the
account.
\11\SPEED Release 5.6 is the latest upgrade in PTC's transaction
processing system.
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The delivering participant's or limited purpose participant's
accounts or associated transfer accounts also will be posted
simultaneously with the appropriate entries for securities debits and
cash credits when the delivery has satisfied all conditions necessary
to complete the transfer (i.e., the delivering account has sufficient
available securities and sufficient NFE; in the case of an account
transfer versus payment, the receiving account has sufficient NFE and
the receiving participant's NDML will not be exceeded; or in the case
of account transfers of securities to a pledgee account by use of the
Collateral Loan Facility, the receipt is approved by the receiving
participant or limited purpose participant).\12\
\12\Currently, the requirement that a receiving participant or
limited purpose participant must approve a transfer of securities to
a pledgee account is specified in PTC's Participant Operating Guide
description of the Collateral Loan Facility but not in PTC's rules.
As a result of the proposed rule change, this requirement now will
be specified in PTC's rules.
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SPEED Release 5.6 is currently being tested and is anticipated to
be operational in early November 1995. The earliest scheduled
implementation date is November 6, 1995, based upon full participant
tests on October 14 and 28, 1995, and assuming no coding or other
changes are required as a result of these and other quality assurance
testing procedures. PTC intends to implement the proposed rule changes
upon implementation of SPEED Release 5.6.
8. Effect on NFE and NDML of Receiving Participant or Limited Purpose
Participant
The change in the sequence of transaction processing to produce
simultaneous debiting and crediting of cash requires that the cash
balance of the receiving participant's account in an account transfer
versus payment be debited even though the delivery has not been
approved by the receiving participant. Match functionality no longer
will operate to defer the debit to the cash balance of the receiving
participant or limited purpose participant until the delivery is
approved. Because unmatched deliveries of account transfers versus
payment no longer will generate a credit to the cash balance of the
delivering participant or limited purpose participant without the
corresponding debit to the receiving participant, it is anticipated
that the implementation of SPEED Release 5.6 may result in increased
incidences of failed deliveries due to NDML and NFE violations.
PTC has monitored potential credit fails in anticipation of SPEED
Release 5.6 by calculating and monitoring participants' NFE and NDML
usage periodically throughout the processing day based on the
hypothetical immediate posting of both matched and unmatched
transactions to the receiving participant's account. Under the
monitoring program, potential NDML violations have been minimal, but
potential NFE violations have been noted. Participants have been
advised of the hypothetical NFE and NDML violations and of the amount
of the credit deficiency that would have occurred if SPEED Release 5.6
was operational. PTC has worked with participants extensively to
prepare them
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for the changes in their procedures that will be required to ensure a
smooth transition to the new transaction processing sequence.
Furthermore, SPEED Release 5.6 also includes an auto-retry facility
that automatically will recycle transactions that fail to complete due
to credit deficiencies. Under the auto-retry facility, transactions
will be resubmitted for the delivery process at set intervals
throughout the day. If it is determined that both the deliverer and
receiver pass the credit checks, the item then will be processed and
debits and credits will be posted to the appropriate accounts.
9. Proposed Changes to PTC's Rules Implementing the Systems
Modifications
The proposed amendments to PTC's rules delete references throughout
the rules to the abeyance account and to the use of a receipt mode as a
condition to completion of an account transfer. PTC also will make
corresponding changes to its Participant Operating Guide that are
consistent with the systems changes of SPEED Release 5.6 and the
proposed rule amendments.
PTC believes that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act\13\ and the rules and regulations
thereunder because it facilitates the prompt and accurate clearance and
settlement of securities transactions and provides for the safeguarding
of securities and funds in PTC's custody or control or for which PTC is
responsible.
\13\15 U.S.C. 78q-1(b)(3)(F) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition
PTC does not believe that the proposed rule change will impose any
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
PTC developed the SPEED Release 5.6 systems modifications in
consultation with its participants and solicited their comments by
Administrative Bulletins dated July 28, 1994; October 28, 1994; and
March 20, 1995. PTC also solicited participant responses to the
proposal informally and at meetings of PTC's Operations Committee of
which participant representatives are members.
Participant comments on the proposed rule change expressed two main
concerns with the original proposal. One concern was from participants
that use the match functionality. These participants were concerned
that the immediate debit to the cash balance of a receiving
participant's account for deliveries not yet approved by the receiving
participant would adversely affect the participant's NFE or NDML. The
second concern was a need to include an auto-retry facility for any
such transactions that fail to complete because of credit deficiencies.
The first concern did not result in any change to the original proposal
because the requirement for the simultaneous debiting and crediting of
cash requires that the receiver's cash balance be debited even though
the delivery has not been approved by the receiver. In response to the
second concern of participants that there be an auto-retry mechanism,
PTC has incorporated a facility into Release 5.6 that will
automatically recycle transactions which fail to complete because of
credit deficiencies.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
(A) By order approve such proposed rule change or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of PTC. All submissions
should refer to file number SR-PTC-95-06 and should be submitted by
November 15, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
\14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26429 Filed 10-24-95; 8:45 am]
BILLING CODE 8010-01-M